It's Good to Be a Bull These Days

NEW YORK (TheStreet) -- It's good to be a bull these days.

For awhile now, critics of 2012's rally in equities have been able to point to the money still pouring into bonds, keeping the yield on the 10-year Treasury below 2%, as evidence the surge in stocks was a low-volume phantom. All Apple(AAPL) and no core.

Tuesday, however, saw a shift as the Federal Reserve's acknowledgment that the economy is indeed improving sent investors scurrying out of bonds. Jefferies described the scene this way in commentary on Wednesday.

"Fixed income investors appear to have capitulated as signs of additional QE [quantitative easing] fade," the firm said, adding later: "After advancing on thin volume since last year, the switch from bonds could lead to a blow-out phase for equities. The fact that earnings revisions are still climbing in contrast to other developed world markets might force further money into the U.S. The main headwind in the short term is high gasoline prices."

The question now is will the money that flows out of bonds (the 10-year yield wrapped Wednesday at 2.3%) get parked in stocks? If a good portion does, it could be prepare for take-off time for the major U.S. equity indices. Wednesday's mixed action wasn't much of a pullback but breadth was fairly weak with decliners outpacing advancers nearly 3-to-1 on the New York Stock Exchange and 2-to-1 on the Nasdaq, so stocks are likely still a a bit overbought at current levels. At the same time, waiting for a pullback hasn't been much of an investment strategy since October, so restlessness could take over.

After all, the Dow Jones Industrial Average has a six-session winning streak going, and is now up 8% for the year, solidly above 13,000. The S&P 500, the lone loser on Wednesday, has gained 10.9%, putting technical resistance in the 1370 range in the rearview mirror. The Nasdaq Composite is the biggest winner of all, surging 16.7% to reach pre-Tech Bubble levels above 3,000.

Potential positive catalysts seem to be everywhere these days (which contrarians would say is the worst sign of all). Sentiment about the financial sector could cross over from searching for value in beaten-down names to real, live optimism following the stress tests, which were positive for the most part, despite Citigroup(C) being put in the penalty box.

There's also an argument to be made that tech stocks, despite being market leaders, are still undervalued. Bank of America Merrill Lynch said Wednesday the sector is trading at a forward price-to-earnings multiple of 12.8X 2012 consensus earnings estimates, 30% below its historical average and "well under its historical premium to the market of 24%."

Heck, even the lack of volatility looks promising. Birinyi Associates noted earlier this week that the 50-day average high/low spread for S&P 500 components had fallen below 1% from a near-term high of 3.01% in October. This has happened 12 other times, according to Birinyi, which said the index rose 4.4% on average over the next six months in the previous instances and has been positive 75% of the time.

As for Thursday's scheduled news, Rite Aid(RAD) is reporting its fiscal fourth-quarter results before the opening bell, and the average estimate of analysts polled by Thomson Reuters is for a loss of 13 cents a share in the February-ended period.

Shares of the Camp Hill, Pa.-based drugstore operator have jumped nearly 50% since the start of 2012 and the company was able to back some of that appreciation up by showing a fair amount of topline growth when it reported February sales results on March 8.

Same-store sales rose 3.1% for the five weeks ended March 3 with pharmacy same-store sales growing 3.7%, despite the negative impact of new generic drug introductions. For the quarter, the company reported a same-store sales increase of 3% with total sales up 2.5% to $7.12 billion.

The big reason for the run-up though, beyond being swept higher along with the broad market, has been speculation that Rite Aid could be a takeover target. Credit Suisse fueled the fire on Wednesday by positing Walgreen(WAG) may make a move.

The firm puts the odds of a deal at 1-in-3, and thinks Rite Aid could "fetch" $3-4 per share. Credit Suisse believes the deal makes strategic sense because it would give Walgreen firmer footing in its battles over reimbursement rates with Express Scripts(ESRX) and the other pharmacy benefit managers, or PBMs, as well as expand its geographic footprint.

"PBMs increasingly view drug retailers as a commodity and are looking to pay less for their services," Credit Suisse said. "WAG believes it's a valuable part of the system as it fills 21% of all retail scripts, but ESRX sees them as only 13% of pharmacy counters. The company may eventually realize it needs more scale to protect profitability and buying Rite Aid provides the only solution. The combined entity would fill ~30% of scripts and represent 21% of pharmacy counters. A deal could also tip the scales in Walgreens' favor in many of the country's largest markets and fill geographical gaps in the Northeast and California."

On the negative side of the ledger, Rite Aid hasn't reported a quarterly profit since May 2007 and it's laboring under a massive debt load of more than $6 billion, so there's still plenty of work to do before the stock can get beyond pocket-change levels (unless a takeout bid does surface).

The sell side is still skeptical of Rite Aid with six of the eight analysts covering the stock at either hold (5) or underperform (1), and the median 12-month price target sitting at $1.75, implying potential downside of more than 14% from current levels. The stock closed Wednesday at $2.05, up 9% on the day after hitting a 52-week high of $2.12 earlier in the session.

Guggenheim Securities weighed in after the recent sales report, saying Rite Aid has started to see a boost from the dispute between Walgreen and Express Scripts, which got serious on Jan. 1 when Walgreen stopped doing business with Express Scripts.

"The Walgreen windfall is modest but accelerating," said the firm, which has a buy rating on the shares. "Within pharmacy, this windfall added about 200 basis points to comps in February, similar to January. The benefit should grow as 90-day scripts filled at WAG expire. We believe it could peak at perhaps 2.5%. There is no front-end benefit and we expect it to stay that way."

The firm thinks Rite Aid's business could be entering a growth spurt that may stretch into 2013.

"We continue to expect EBITDA [earnings before interest, taxes, depreciation and amortization] to accelerate over the next four to five quarters, driven by the maturation of the Wellness Plus loyalty program, the generic wave, and the WAG windfall," Guggenheim said. "This will likely begin with 4Q 2011, which should see 12% or better growth, although a portion of this would come from the extra week. Double-digit gains could persist for the first three quarters of 2012."

Check out TheStreet's quote page for Rite Aid for year-to-date share performance, analyst ratings, earnings estimates and much more.

Other companies due to report their quarterly results include ATP Oil & Gas(ATPG), Cato Corp.(CATO), dELIA*s(DLIA), Discovery Laboratories(DSCO), Dole Food(DOLE), Ivanhoe Energy(IVAN), New York & Co.(NWY), Pinnacle Airlines(PNCL), Ross Stores(ROST), Scholastic Corp.(SCHL), SmartHeat(HEAT), SonoSite(SONO), and Winnebago Industries(WGO).

Thursday's economic calendar includes the usual weekly initial and continuing jobless claims at 8:30 a.m. ET; the Empire State manufacturing index for March at 8:30 a.m. ET; the producer price index report for February at 8:30 a.m. ET; and the Philly Fed survey at 10 a.m. ET.

The consensus estimate is looking for initial claims to come in at 355,000, down slightly from the previous week's reading of 360,000.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, is in line with the consensus view, saying a period of consolidation is in order and that shouldn't be cause to worry about the health of the recovery.

"Viewed together with indicators of labor demand, claims are already low enough to signal payroll growth of 250-to-300K per month, so we would not be concerned to see no further decline in claims until, say, the third quarter," he said. "But some observers might seek to use the data to support a less optimistic view than our own."

And finally, Guess?(GES) was the big loser in Wednesday's after-hours session after the company gave a weak outlook for the current quarter.

The Los Angeles fashion apparel maker and retailer forecast earnings of 25 to 28 cents a share on revenue ranging from $560 million to $575 million for its fiscal first quarter ending in April. Wall Street's current consensus estimate is for earnings of 48 cents a share on revenue of $609.7 million in the current quarter. Guess? said it plans to ramp up spending on marketing but doesn't see revenue picking up from these efforts until the second half of the year.

The stock was last quoted at $32.28, down 12%, on volume of more than 730,000, according to Nasdaq.com.